Why Startups? Let’s Distinguish Why City Officials Should be Focused on Strategic Investment in Innovation-Driven Ventures (and why most are failing despite trying)
It’s one of the most misunderstood yet consequential distinctions in economic development today: the difference between startups and small businesses. Cities talk about “entrepreneurship” like it’s a monolithic idea, but if we’re being intellectually honest, and we must be if we’re going to get serious about 21st-century economic growth, we need to stop treating a new Main Street cupcake shop like it’s comparable to an AI platform that just closed a $3 million seed round. One is a business. The other is a startup. And the reasons cities should invest in startups—not just “small businesses”—are vast, compelling, and empirically undeniable.
Let’s unpack Why Startups, and why this matters more now than ever.
Startups Are Not Small Businesses
Let’s start where everyone gets it wrong. A startup, as defined by Steve Blank, is “a temporary organization designed to search for a repeatable and scalable business model.” It’s a hypothesis, an experiment, a high-risk, high-reward endeavor. A small business, by contrast, is built to last, often profitable from day one, rooted in known markets, and designed not to scale exponentially, but to serve reliably. Think local laundromat versus cloud-based logistics API.
The distinction isn’t semantic, it’s structural and guiding. And when cities lump them together under the banner of “supporting local business,” they shortchange the potential of startups and misallocate the support ecosystems those ventures actually need.
All that said, we’re not here to make that case, so if you’d like to read further why startups are not small businesses, click here. If seeking more support with local legislators, here is a white paper guiding government agencies as to how and why to distinguish small businesses from startups.
1. Job Creation: Startups Punch Above Their Weight
If you want job growth, rather than jobs, support startups, not just because they hire, but because they create net new jobs.
According to research from the Kauffman Foundation, “new and young companies are the primary source of job creation in the American economy.” In fact, without new firms, net job creation in the U.S. would be negative in most years. A 2010 study with John Haltiwanger, Javier Miranda, Dane Stangler, Bob Litan, Paul Kedrosky, and Carl Schramm found that firms less than five years old accounted for nearly all net job creation in the U.S. between 1980 and 2005.
“Because startups that develop organically are almost solely the drivers of job growth, job-creation policies aimed at luring larger, established employers will inevitably fail,” said the study’s author, Tim Kane, Kauffman Foundation senior fellow in Research and Policy. “Such city and state policies are doomed not only because they are zero-sum, but because they are based in unrealistic employment growth models.”
Compare that to small businesses, which, while important for employment, often shift jobs around within a regional economy rather than creating new net employment. Startups grow fast and hire fast, even if MOST (overwhelmingly most) don’t last. When they succeed, they scale in a way that multiplies employment, rapidly. Stripe employed 2,500+ people within a few years. Your average corner bakery, if it makes it that long, might employ ten.
In plain English: it’s about being net new, not small nor even simply new. Support startups, and you build permanent job growth, support incumbents or existing business models, and you merely shuffle the deck.
2. Public Appeal: Startups Win Hearts and Wallets
People love a good startup story. There’s a romance to the underdog, the innovator, the 23-year-old dropout coding in a garage. Cities benefit from that narrative halo.
Startups attract aspirational talent and bring in the ambitious, the curious, the tireless. That creates not just jobs but community culture: hackathons, pitch nights, innovation festivals. Look at Boulder, CO or Austin, TX because they didn’t become a magnet for talent because of tax credits or retail square footage. It became a startup hub with stories told and community built and supported, and people followed.
More, consumer enthusiasm follows. Even more? Voters like a good story of an innovation brought to life and entrepreneurship fostered (not business ownership! Startup founding). Consider the meteoric rise of brand affinity in DTC startups like Glossier or Warby Parker. People like to support new ideas. Local governments benefit from this buzz, especially when a homegrown startup goes national or global. It puts a city on the map. Chattanooga, Tennessee, where The Gig was put in place (the city’s fiber-optic broadband network), helped spawn dozens of startups, and international attention; now there pushing to be Quantum, something I’ve been driving cities to do while they’d rather play catchup doing blockchain, crypto, and AI.
3. Media Attention: Startups Drive Headlines That Shape Identity
You show me a regional news headline about a new HVAC company, I’ll show you ten about tech startups raising capital, launching automation tools, or getting acquired. Media chases velocity and novelty, and only startups offer both.
Cities that foster startups dominate economic and tech media coverage: VC rounds, acquisitions, IPOs, and entrepreneurial events make headlines. Did you notice of Miami post-2020? A combination of founder migration, VC attention, and some spicy Twitter behavior from the mayor turned it into a headline-grabbing startup city seemingly overnight.
Media matters not just for PR, but for investor attraction, tourism, even real estate development. When your city is in TechCrunch, talent shows up. When Public Affairs is involved, they teach, guide, and publicize your work. Capital follows talent (not the other way around by the way!). And then your economic base changes, permanently.
4. Startup Economic Impact: Multipliers You Can’t Ignore
Startups don’t just grow, they explode. And when they do, they create ecosystems.
One successful startup begets another. The cofounders who exit start new companies (if the culture and economy of your city is right for it). Early employees become angel investors. Engineers hire engineers. Suppliers scale up to meet demand. Universities churn out interns who join the fray.
This is what economists call the multiplier effect. The National Bureau of Economic Research found that each high-tech job in a region creates 4.3 additional jobs in the local economy over time. For manufacturing, that number is closer to 1.6. For retail? Nearly zero.
Let me say that again since most cities are pushing for local retail – each retail job in a local economy creates near zero additional jobs. Your job growth policy is wrong (and I’d even hazard criticizing you, you’re taking the easy way out because you don’t understand this world)
In fact, a Brookings report on “Innovation Districts” notes that startup clusters generate more rapid wage growth and productivity gains than virtually any other form of economic development. Innovation economies attract federal grants, research contracts, and industry partnerships. They also retain talent, because talent stays where opportunities grow.
As The Economist put it: “Startups are the R&D labs of capitalism.” And if cities are wise, they’ll start funding their own labs before the competition outpaces them.
Startups Aren’t Optional, Cities, if you actually give a damn
So, you have your small business policy, your small business resources, and your small business programs, and you feel satisfied that small business means startup. That’s like saying the future of economic development is making sure we have more Blockbusters and fewer Netflixes.
Supporting startups isn’t a feel-good initiative. It’s an economic imperative; they generate net new jobs, they attract ambitious talent, they make headlines that shape your city’s identity, and they spark economic multipliers that build entire industries.
If you’re running an EDC, chamber of commerce, or mayor’s office and still framing your entrepreneurship efforts around ribbon-cuttings and shop local campaigns, you’re missing the forest for the trees. Both small businesses and startups are vital, but only startups change the game (that’s their distinguishing characteristic).
Want to see real growth in your city? Invest in the people and organizations fostering startups. Don’t invest directly in startups! That’s a fool’s errand for government; invest in reducing regulation, supporting the ecosystem builders, engaging journalists, sponsoring the events and programs, and bringing in consultants, public affairs professionals, and investors from other cities, who specialize and have experience in “startups.” Not just because they need you, frankly, you need them more.
Maybe take a look at how Tulsa, Chattanooga, or even Lubbock beat your city to the punch. Not certain, not sure, or want to argue with me, I’m available to sit in a room with local leaders and lawmakers and fix this there.
Innovation doesn’t wear an apron and serve brunch. It prototypes, tests, fails, and rebuilds. Cities that don’t back that messiness are writing their own obituaries.
1000! Strong Yes… this has always been true, but now with Ai it’s even more so. I’m working on turning Evanston startup friendly after trying and failing in Rochester and Knoxville. Please keep us posted about what you learn on how to change hearts and minds in cities not named SF.
Adam Lupu love getting names of places for me to study. Stay tuned, I’ll take a crack and dig in on them.
When developing an innovative ecosystem it’s imperative to create the right environment that fosters startups and invests in innovation.
Many emerging markets struggle with brain drain, because they simply do not have the environment for brilliant minds and risk takers to thrive.
Great article Paul O’Brien
This topic is exhausting… I’ve attempted to help every community I’ve ever lived in, and have helped most, but very few are competitive. The way ED is structured and the way people in it are trained, it’s really a corp relocation service, and ED generally does corp relocation pretty well. I’ve only known a handful in the world who were good at helping build businesses (mostly in WA during the 1980s and in SV, and in VA for gov’t contractors).
However, most of the people in ED aren’t qualified to help business business builders, which is what really drives the growth in the economy of course, as anyone can see who looks at the economic development that occurs from a successful company. Generally speaking, successful entrepreneurs are in the best position to help guide entrepreneurs and their teams–the only ones who have actually done it.
Mark Montgomery agreed. A point underlying all of what I wrote here – because many misunderstood my headline – don’t invest in startups directly!! Invest in those more experienced and capable builders of the startup ecosystem.
Very helpful, as always! Did you come across any published content that attempts to quantify the economic impact startups have on local/regional/state economies?
Michael Bob Starr good study in the article itself, Kauffman. Let me dig deeper.
I admit I fired off that question before I fully read the article. I’m going to look into the Kauffman study. The Brookings report you cited also looks promising.
I want to be careful with this. Cities should invest in removing the friction to allow for startup creation and scaling.
Cities should not invest or try to guide startups. Your comment about startups as a source of job creation. When the city gets too involved you have well intentioned, but misaligned incentives.
Example a city run accelerator. The city’s KPI is job growth, the startup’s KPI is value creation. Sometimes those intersect, sometimes they don’t. It can cause behavior detrimental to the startup even if its coming from a good place.
Just make it easier to build, fail or succeed, and build again.
Jason Scharf ah but reread the article itself, I’m very clear that cities should not be investing in a startup.
“In startups” as in “distinct from new businesses”
Paul O’Brien I saw. But the actions to “invest” or even guide can be misaligned. What does invest in ecosystem builders mean? How does the city know good ones from bad ones? Things like that.
I am all for empowering cities through startups
Jason Scharf well put questions, all in part what I’ve talked/written about in the past OR what I’m framing now
Such as…
No one without direct startup experience
Underwrite labs or venture studios, not accelerators
Promote things with evident outcomes greater than average, not because of a single win
Separate small business or new business from startup
I don’t think anyone actually confuses the implications of an old economy small company v a startup.
I am not quite certain what actual “investment” you suggest a city should make in startups.
Environmentally, a city should seek to support all businesses of all types — big business, small business, startups.
Tracing back to Tracor and Frank McBee in 1962 which is the wellspring of tech in ATX, I would say the City of Austin has been a passive/aggressive, multi-personality, polar impaired host for business of all kinds.
When cities grow, they feed upon themselves. I moved to ATX when the population was less than 250,000 and I left when the SMSA was 2.6MM and at many times, the growth fed upon itself.
If you grow in that magnitude over 40 years, you have a lot of support — groceries, McDonalds, cleaners, landscape contractors, brake shops — that is simply driven by more people.
I don’t know what direct investment you contemplate a city making, but it would be the height of folly to suggest that taxpayer money should be invested in private sector business development.
JLM
Jeffrey L Minch read the article
I say a few times that governments should not be investing directly in startups.
And do people know the difference between small company and startup?
No, most definitely not. It’s probably my most received question or argument. People equate startup with new, new business.
Jeffrey L Minch Paul O’Brien The challenge will be that local governments control almost nothing about the local economy. Large businesses play one location against another to get the most they can.
All that the local governments can do is change zoning to allow new business types to operate in a given area, waive development fees, give the company back the local taxes and fees they pay over a given period of time.
These things aren’t necessarily useful to Start Ups. The calculations for these tax and fee agreements are based upon what the company does at its other locations, so a local government would just need to make an open ended agreement with unspecified value which is very difficult to account for in a municipal budget.
So it’s not impossible, but it is difficult for local governments to things that are a win-win in terms of Start Ups.
W O W!
Wallace McClure Y E S
I’m in agreement. I don’t see it happening locally because of vested interest and arrogance.
Wallace McClure that’s usually the problem
But, in fairness and their defense, that’s also because overwhelmingly most people have no idea how startups work or how to help them — even the people supported for and claiming to be doing so.
That vested interest and arrogance is both because Local Government interest is really just in holding office and doing something that appears meaningful so that you win the support of voters without screwing something up. The arrogance is a protective reaction, that clearly they know what they’re doing, they’re the ones elected.
Paul O’Brien back in January, I went to this tech get together down the street. It ended up that was a big deal put together by the local chamber. I talked to the president of the chamber and he didn’t have a clue regarding the reality of innovation, entrepreneurship, etc. he said he was working hand in hand with our local angel group. I talked to another guy that had left me a message last summer, still have it. Basically, the whole shindig was a promo for the local chamber and their promoting of entrepreneurship and startups.
I was eating lunch with a good buddy who is also the president of our angel group. I asked him the chamber had contact them. He said he’d heard thru the grapevine about their initiative, but they hadn’t called. I’m sitting there thinking, why believe anyone in an organization where no one has been thru a startup, made a pitch, been in the room when pitches are discussed, or made an investment.
What do you do but laugh?
Wallace McClure that’s one of many stories driving me
“Invest in the people and organizations fostering startups. Don’t invest directly in startups!”
Do you want municipal owned co-working spaces?
David V Duccini I didn’t say owned
Should work spaces be municipally owned? Maybe. Libraries already are and they make a hell of a lot more sense as coworking spaces…
Paul O’Brien Not a hater either way — we’ve been thinking of buying up baby banks in rural areas and converting them to co-working spaces
Excellent on-point article. I’d agree direct investments by a city often turn out poorly (Texas Technology Fund debacle), but the case could be made for doing so—if done properly.
Examples would include creating a ‘co-investment’ fund managed by a professional VC team who is investing para pasu along with other professional funds—look at Cleveland’s JumpStartVC—or direct investments by city’s pension/local HNW/FOs into recognized VCs with side letters agreeing to target/support re-located/homegrown startups by these funds—see New Mexico, Tulsa and Calgary.
Paul A. Bell yep in all accounts. You might enjoy my recent Venture Studio push. Cities, stop supporting coworking spaces and accelerators, support the operators putting the work in.
YES, YES, YES, and let’s see which cities give a damn.
Douglas Peters Will Dugger Brad Benham Doug McIntyre, Ph.D. You’re not the ones I need to convince, but you’re going to start hearing me parrot a lot of these arguments.
Nope. When startups only have a 1 in 10 success ratio, a local, state, or Federal government has no business placing taxpayer money at risk in businesses they have no expertise to evaluate (see the Obama fiasco with Solara). Governments should stay in their lane.
But there is something governments SHOULD do to promote innovation. Last year we submitted a proposal to the US DEPT COMNERCE to create a NEW CLASS of business The X Corp.
This special type of eXperimental startup would have many of the tax and other regulatory burdens WAIVED until the company met certain revenue goals.
And it would give special tax treatment to INVESTORS to offset and correct their risk exposure (Today when a company fails the investors lose everything, but when it succeeds the government gets 30% – how is that fair?)
Like TIF zones, local state and federal governments should create “greenhouse” legislation to make it easier to launch an experimental startup.
Chris Sorensen read the article
Chris Sorensen I would disagree. There IS a way to do it and deliver a multiplier effect. A properly constructed, ‘index-like’ fund structure could deliver 3x+ the cost of capital for states and the Fed. Govt. on the returns alone (5% interest on the munis or Treasuries, on average) 15% annualized returns on an ‘average’ venture fund built right. See https://bit.ly/43FhNUA & https://bit.ly/4dJRxK3
Chris Sorensen Our Legacy Funds platform was purpose built to do just this! See https://bit.ly/4gcyg64
Chris Sorensen Nope. Dont think tax dollars were suggested.
Here is a clip from the post:
Want to see real growth in your city? Invest in the people and organizations fostering startups. Don’t invest directly in startups! That’s a fool’s errand for government; invest in reducing regulation, supporting the ecosystem builders, engaging journalists, sponsoring the events and programs, and bringing in consultants, public affairs professionals, and investors from other cities, who specialize and have experience in “startups.”
Also dony think investors need more subsidizing. Startups are not for everyone, investors included.
That said: Hi Chris! It has been awhile.
A great reminder that startups and small businesses aren’t interchangeable when it comes to impact. The multiplier effect and talent retention data speak for themselves.
If a city doesn’t have a strong startup foundation yet, where do you think it should start: building the narrative, attracting ecosystem builders, or investing in education and talent pipelines?
Alison Schnoes ecosystem builders. No question.
Cities almost all think the solution is capital, networking, and events. They’re wrong.
Bring in the builders, of sectors relevant to the experiences of the region, and support that they’ll put in the work that matters.
Well said. The fact that this might be news to people anytime after 1997 breaks my heart but I’m glad you wrote it.
Paul O’Brien CA and WA do that pretty well through institutions, but the most successful I’ve known, which are some of the most successful in history, were mostly do to the ability to identify and gain broad community support for world class entrepreneurs combined with ventures that have legs.
That’s pretty rare. None came out of publicly funded accelerators or incubators — a couple of the VC firms had public entities as LPs (e.g., the early Sequoia). Public entities were followers to experience, unlike here in NM where the state is the only game in town.
To be fair to ED officials, it also requires a regional economy and culture that is motivated, understands the importance of business building, and can rally the essentials to be successful. That varies over time. My old stomping grounds of Seattle now suffers from the dominance of Big Techs. Future leaders may rise in the midwest or deep south. There is also a risk of the U.S. losing its leadership due to market and political dysfunction.
Bottom line – building successful companies is really difficult. We identified 14 essentials in my VC days. Very few have half that. It’s possible to be successful anyway, but that’s the very rare outlier and a different topic.
Mark Montgomery would love to hear about the 14 essentials. And if you don’t have them published, maybe I write them up with / for you and share them as such.
This perspective is spot-on. Startups aren’t just businesses. They’re growth engines for entire ecosystems. The failure to distinguish them from small businesses in policy and support is a missed opportunity we see over and over again. Innovation deserves infrastructure.
Cc: Dave Knox although it may not be an either main st biz or startup, but mixed bets on each, including ETA
Ramon P. Llamas, MPH (LION) thanks for sharing. Our $17 million investment in SparkHaus is a good example our community leaders making this exact bet on startups! Would welcome the opportunity to host Paul O’Brien to see what we are building.
Dave Knox let me know when you take Paul O’Brien on a tour in the Cov! He’ll witness tons of energy, a compact and walkable community + nationally recognized food and drinks. Midwest charm meets historic European architecture with community-driven innovation
100% agree. Too many think small business owners are entrepreneurs. They are primarily employees who sign their own checks. Entrepreneurship is my opinion is not so much about business as it is about identifying problems and ten developing solutions. Some of these solutions will be new ventures. Rinse and repeat.
Knoxville Chamber (Knoxville, Tennessee) is doing an amazing job in this regard!
Kevin Phillipson Robert Hanna This is the article we discussed that makes the case for making sure your regional economic development strategy includes support for startups.
Paul O’Brien I have published on it in the past but don’t think any of it is online, unless archived. The first 7 or 8 are obvious and commonly discussed. The most underrated and in some respects most difficult to provide, is relevant experience and early stage customer support in the culture, and by support I mean regional bias, not government subsidies (or any other).
Capital is pretty easy for institutions to provide. Unfortunately, they are generally clueless about the conflicts, manipulation and other “inefficiencies” in VC, which typically manifests as exploitation and/or corruption of public funding. It takes a long time to become really good at venture investing, and it starts with really strong governance.
NM for example has improved considerably since the governor’s office first asked me to critique the program (20 years ago), and one can make the case that it provides a financial and ED ROI, but we’ve still never had a significant lasting success (something comparable to the national labs in economic output). Flipping to CA is still the primary skill set. Enough said. Good luck.
This is right on the money Paul. In my role I meet with city, county and state officials who are all about opening co-working locations as the cornerstone of their entrepreneurship initiative. Heavy sigh. There is a reason garage-based startups are a stereo-type. It’s not about a building, it’s about enlightened government officials working together with entrepreneurs, universities, investors and Venture Studios/Incubators/Accelerators/scar-tissued mentors as the real drivers of entrepreneurial momentum. BTW you’ll be adding Abilene to your list soon enough based on the work of Michael Bob Starr and Douglas Peters.
I honestly think the whole equating “building co-working spaces” = “creating startup ecosystems” is a meme driven by successful investors who mostly made their money in real estate.
They want a piece of the startup unicorn action but they’re just defaulting to what’s familiar to them. After all co-working space is just real estate.
Public officials look at it as just another commercial property tax base to exploit.
Especially in parts of the country where real estate development is a big economic driver already.
e.g. Welcome to Florida.
Reading the spot on analysis, you could simplify everything by saying the internet economy is driven by startups and for anyone paying attention, that should be enough
Right on Paul! I Couldn’t have said it better myself.
preach the good word!
Love this, Paul O’Brien. Especially for hashtag#stpete, worth sharing as we build a vision of a city focused on tech.
On a larger scale, not sure that I agree that cities have to cultivate a tech startup community or die. The flywheel effect can be started by all kinds of risk-takers willing to be the first one to do something big. Thinking Vivian Howard/Kinston, NC (restaurants), Royal Robbins/Yosemite (climbing), Donald Judd/Marfa, TX (art). They started a business or a movement, and attracted/inspired the growth of small businesses around them – creating thriving communities in their own right. There is real value and longevity in these places that has nothing to do with tech.
Also, even tech hubs need healthy small businesses to thrive, in fact, healthy economies have a healthy small businesses community and support system. So, it’s not really an either/or situation, right?
You are right on about how we view economic development, though. Mushing small businesses and startups together is doing a disservice to both. I see a future for St. Pete where are there are two tracks of support: one for small businesses and one for startups. Both have services and investment (and Investment!) with clear entry points and pathways.
Brooke Beeler great comments and thank you.
I’d add to clarify, I’m a HUGE detractor of the idea that tech is a sector. I think the better part of our challenges today are a result of society distinguishing tech as a specific industry; worse, in turn causing hate and fear towards tech (tech bros, stealing our data, BigTech), etc.
Note of my article, I never said cities need to invest in tech. And startups are not tech (per se).
Technology is merely the application of invention. Any invention. A new beverage recipe is tech.
Startups are temporary ventures in search of a new business model. That’s likely with tech, because tech correlates with new, but there is no reason a restaurant offering a different business model shouldn’t be distinguished as a startup, distinct from being a new business like other new restaurants
Great points here and I could t agree more with the right focus on supporting true start ups to attract the right talent and set up for future relevancy…
That said, which types of organizations, if not chambers of commerce, do you view are appropriate (practically and optically speaking) to ensure small busieness can thrive and continue to get the support needed… this sounds like a trade-off as opposed to a comprehensive approach to support both startups and the many small businesses that line main streets in cities, which keep citizens plugged in and actively spending money.
It also ensures that the talent we attract have places to unwind and enjoy the character small businesses create.
Do you feel this should fall solely on public entities such as the economic development teams of municipalities and counties?
I really hope this comment comes off as complimentary/constructive and not contrary… thanks!!!!
Scott Callison, CUDE, MBA Stay tuned, in fact, I have an article and white paper about to be published about Chambers
But let me add here, to be clear, no one is saying they *can’t* do it nor would I say it should fall on economic development teams of municipalities and counties (alone), for the same reason: none are structured and staffed in such a way that they serve startups.
My Chamber article and the paper will start to explore what Chambers could do instead but ultimately, more meaningfully, at issue is that startups are not small businesses and new businesses are not “startups” – they’re completely different things and yet society continues to bundle new/small business with startup as though they are the same, “practically and optically speaking) to ensure small busieness can thrive and continue to get the support needed”
THAT, I cover a lot: https://seobrien.com/new-collar-jobs-and-the-critical-distinction-of-startups-from-small-businesses
Startups = cultural lightning rods with multiplier effects, I couldn’t agree more Paul O’Brien!
Ashby Green the challenge is that while many agree, most won’t draw the lines of distinction, to keep talent, advice, and capital aligned to the lane where appropriate.
Great article, Paul, one that shares much needed truths about the differences between small businesses and startups.
Bob Barker cheers. Reinforcing it now as I hit publish again, this time, WHY venture capital isn’t showing up.